1) Our Perspective
PENSION CRISIS - AUGUST 2016
Ronald Schwartz, CFA
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Ron is a Senior Portfolio
Manager focused on the TaxExempt Strategies. He has
worked in the investment
management industry since
1982. Ron received a B.A. in
Business Administration from
Adelphi University and is a CFA
Charterholder and a member of
the CFA Society of Orlando.
U.S. public pension investment returns for fiscal year 2016, which ended on June 30th, are
currently being released, and the largest funds have posted returns well below target. Negative
headlines surrounding state and cities&rsquo; underfunded pension plans now appear almost daily and it&rsquo;s
no coincidence that the states with the worst pension funding ratios now have the widest credit
spreads (IL, CT, PA, NJ, and KY). Unfunded pension liabilities of state and local issuers have
increased significantly over the past decade and have become a key credit driver for the municipal
bond asset class. Unfortunately, the negative credit pension pressure is likely to persist and grow
as pension costs rise faster than revenues for most issuers. Demographic shifts combined with
lower investment returns will continue to exacerbate the unfunded pension problem and threaten
municipal credit quality over the next several years. As you can see in the chart below the unfunded
liability is estimated, using conservative assumptions, to be $1.8 trillion, which is 113% of state and
local government taxes. Growing public pension liabilities are now competing with, and in some
cases crowding out, other infrastructure spending priorities.
Unfunded Liability of the State and Local Government Defined Benefit Pension Plans as
Percent of State &amp; Local Taxed
Scott Andreson
Director, Municipal Research
Scott is the Director of Municipal
Research for Seix Investment
Advisors. He has more than 17
years of investment experience.
He earned his MPA from USC
and is a current officer of the
National Federation of Municipal
Analysts.
CONTRIBUTORS
Dusty Self
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Phillip Hooks, CFA
Vice President,
Municipal Credit Research
Source: Federal Reserve Board, Financial Account of the United States

2) Our Perspective
PENSION CRISIS - AUGUST 2016
As recently as 2001, public pension funds on average were fully funded, but have dropped nearly 30% since then to 73.6% (see
chart below). This is despite many states enacting pension reform over the past few years and increasing contributions. Pension
asset growth has not kept pace with unfunded liabilities as a result of weak investment returns and the graying demographics of
public workers. Even pension systems that are comparatively well-funded are at greater risk of market value loss as they pursue
high risk-return investment strategies in the current low rate environment.
Public Pension Plans&rsquo; Funded Ratios Have Dropped Nearly 30% Since 2001
Source: PublicPlansData.org
Public pension systems have posted their worst investment results since the financial crisis, recording a median increase of 0.36%
for 2015, falling far short of their 7%-8% targeted annual returns that they need to pay retirement benefits, according to the Wilshire
Trust Universe Comparison Service. As you can see in the chart below, the three largest pension systems (CalPERS, CalSTRS,
NYCRF) just posted their 2016 investment results last month, which were their worst performance in seven years, and are far short
of their assumed returns. Investment earnings are key as they account for half of all pension revenues and must meet the assumed
rate, or pension contributions must increase for liabilities to not grow. With unfunded pension liabilities at historic highs, and
investment returns well below targeted returns, public pension risks are clearly growing.
California and New York Public Pension Investment Returns in Fiscal 2016
Actual public pension investment returns fell far short of assumed returns.
Note: Fiscal year ends 30 June for CalPERS and CalSTRS and 31 March for NYCRF
Source: Pension system websites